Top management salary influences an organization’s results
One of the most pressing question regarding top management is “how much a CEO earns per year?” This may vary from thousands to millions of dollars ranges, depending on the industry and the resources a company allocates.
In many organizations, making sure they justify their CEO’s payment is a priority which can be seen in the annual report. For example, in Rio Tinto’s annual report, they devote almost the same amount of space to explaining the remuneration schemes for top management as they do accounting for performance.
The problem is that some organizations were advised by remuneration consultants to increase the compensation of top managers, on the basis that they need to do the job they’re hired for. This leads to a bigger gap in terms of compensation and benefits between top management and the rest of the employees. Because of this, boards try to justify their incentives, which feeds the industry that has developed around designing executive packages, and this becomes a never ending circle.
Organizations that overemphasize the focus on financial results to offer bonuses, and refer mainly to the shareholders’ perceived needs, tend to neglect other important stakeholders. To prevent this from happening there are a few ideas that can be applied.
Balance KPIs:
Rio Tinto has 7 KPIs in its annual report, 5 of which are financial (for example: Capital expenditure) and 2 of which are HSSE (all injury frequency rate and Greenhouse gas emissions intensity). It’s easy to simplify things, but having only a hand of KPIs will not offer a relevant overview of the company’s achievements.
To present the data in a more objective way, and also to help the decision making process, organizations can also have a balanced scorecard present in their annual report, with at least 2 balanced KPIs for each objective. Balancing KPIs is a technique deployed in KPI selection workshops that allows companies to measure the achievement of their established strategic objectives from two perspectives. Balancing implies selecting KPIs that complement one another. The main balancing approaches refer to ensuring that we measure both:
- Quantity and Quality;
- Subjectivity and Objectivity;
- Efficiency and Effectiveness.
Use scorecards and dashboards to track performance:
Organizations use KPIs to measure what is important for them. Depending on the context, the KPIs can be used:
- At a strategic level, for measuring performance in the long-term planning – on the organizational scorecard; or
- At a departmental, for measuring performance in the short-term – on the dashboard.
Below are a few examples of KPIs which can be used for measuring performance on the scorecard or dashboard, depending on the context, adapted from a 2014 article, published in the Harvard Business Review:
- % Net profit margin
- % Return on equity
- % Earnings yield
- $ Earnings per share (EPS)
- # Price per dividend ratio
- % Dividend payout ratio (DPR)
Balancing KPIs and linking the short and long-term performance of the organization to the compensation system of the top management will lead to an improvement in results and eventually in increasing the organization’s profits.
Also the board should be looking for casual connections between what happens today and how it may influence the future of the organization. For example, how employee satisfaction can influence product development. Mapping those relations and including them in each top manager’s scorecard is a way to keep the organization on track. Having the board responsible for the satisfaction of the employee will lead to increased customer satisfaction, which will lead to an increase in shareholders satisfaction.
References:
- Kenny, G. (2014), How Boards Can Rein in CEO Pay
- Toma, M. (2014), What is KPI Balancing?
- Rio Tinto (2013), Delivering greater value for shareholders
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Tags: Employee Performance, Incentives, Performance Management
